Next’s first half sales grew 10% to £3.3bn, helped by favourable weather and major disruption at a UK competitor. UK sales were up 8%, with both retail and online divisions in positive territory. Overseas sales grew at a faster pace of 33%.
Pre-tax profits rose 14% to £515mn, driven by the top line growth and a tight grip on costs.
Free cash flow improved from £0.3bn to £0.4bn, helped by the increase in profitability. Net debt, including lease liabilities, fell from £1.7bn to £1.5bn.
Full-year pre-tax profit guidance has been maintained, expected to grow by 9.3% to £1.1bn. Next cautioned that government policy has been unfavourable, and it now expects “anaemic growth” at best from the UK economy over the medium-to-long term.
An interim dividend of 87p per share has been announced, up 16%.
The shares fell 5.5% in early trading.
Our view
Next delivered a strong set of first-half results, with performance helped by favourable weather and disruption at a major competitor in the UK. Full-year profit guidance now looks well within reach, but Next cautioned that the longer-term growth prospects of the UK economy look bleak, which spooked markets on the day.
Strong demand in its online channel remains a running theme and we continue to see it as the main growth driver. It already accounts for well over half of group sales, and expansion overseas is still in its early stages.
Around 90% of its overseas business comes from Europe and the Middle East, both of which can be serviced quickly and cheaply from the UK. Given the untapped size of these markets, and increasing traction in the US, there’s a big opportunity if Next can execute its expansion plans well. But as ever, overseas expansion carries a high level of execution risk.
We’re pleased to see full-price sales continue their upward trajectory. Delivering what fashion-conscious consumers want at the right price point is exactly what’s helping to keep Next’s profitability at the top end of its peer group.
While there are plenty of positives to take away from Next’s position in the industry, it’s important to remember that retail is a fickle sector. Styles can change quickly, meaning the group will always be chasing a moving target to deliver the right offering to customers. And any big missteps on this front will be costly.
The high street is also in decline, and Next isn’t immune. Despite a first-half uptick in store sales, the longer-term trend has been moving in the wrong direction. Next has also argued that UK government policy has been a double whammy for businesses - unfavourable for the general economy and raising employment costs.
Despite the challenges, we believe Next is in a strong position to continue dominating the UK market. Debt levels are comfortable, and there’s plenty of surplus cash, which Next plans to either return to shareholders or scoop up new brands if any attractive opportunities arise. Currently, there’s a prospective 2.3% dividend yield on offer, but as always, no shareholder returns are guaranteed.
Next remains one of our favourite companies in the retail industry, and we see the potential for more success if it can nail its overseas expansion. We don’t see the valuation as too demanding given its strong market position and growth opportunities. But given the cyclicality of the industry, investors still need to prepare for ups and downs.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Next’s management of ESG issues is strong.
The group’s ESG issues are overseen by the Board, but its overall reporting doesn't meet leading standards. ESG performance targets aren't factored into executive compensation, and it discloses weak environmental policies and whistleblower programs.
Next key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is not advice or a recommendation to buy, sell or hold any investment.No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.Non - independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place(including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.Please see our full non - independent research disclosure for more information.